Industry Handbook: Porter's 5 Forces Analysis
  1. The Industry Handbook: Overview
  2. Industry Handbook: Porter's 5 Forces Analysis
  3. The Industry Handbook: The Airline Industry
  4. The Industry Handbook: The Oil Services Industry
  5. The Industry Handbook: Precious Metals
  6. The Industry Handbook: Automobiles
  7. The Industry Handbook: The Retailing Industry
  8. The Industry Handbook: The Banking Industry
  9. The Industry Handbook: Biotechnology
  10. The Industry Handbook: The Semiconductor Industry
  11. The Industry Handbook: The Insurance Industry
  12. The Industry Handbook: The Telecommunications Industry
  13. The Industry Handbook: The Utilties Industry
  14. The Industry Handbook: The Internet Industry

Industry Handbook: Porter's 5 Forces Analysis

If you are not familiar with the five competitive forces model, here is a brief background on who developed it, and why it is useful.

The model originated from Michael E. Porter's 1980 book "Competitive Strategy: Techniques for Analyzing Industries and Competitors." Since then, it has become a frequently used tool for analyzing a company's industry structure and its corporate strategy.

In his book, Porter identified five competitive forces that shape every single industry and market. These forces help us to analyze everything from the intensity of competition to the profitability and attractiveness of an industry. Figure 1 shows the relationship between the different competitive forces.

Figure 1
  1. Threat of New Entrants - The easier it is for new companies to enter the industry, the more cutthroat competition there will be. Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include:

    Figure 1
  2. Power of Suppliers - This is how much pressure suppliers can place on a business. If one supplier has a large enough impact to affect a company's margins and volumes, then it holds substantial power. Here are a few reasons that suppliers might have power:

    • Existing loyalty to major brands
    • Incentives for using a particular buyer (such as frequent shopper programs)
    • High fixed costs
    • Scarcity of resources
    • High costs of switching companies
    • Government restrictions or legislation
  3. Power of Buyers - This is how much pressure customers can place on a business. If one customer has a large enough impact to affect a company's margins and volumes, then the customer hold substantial power. Here are a few reasons that customers might have power:

    • There are very few suppliers of a particular product
    • There are no substitutes
    • Switching to another (competitive) product is very costly
    • The product is extremely important to buyers - can\'t do without it
    • The supplying industry has a higher profitability than the buying industry
  4. Availability of Substitutes - What is the likelihood that someone will switch to a competitive product or service? If the cost of switching is low, then this poses a serious threat. Here are a few factors that can affect the threat of substitutes:

    • Small number of buyers
    • Purchases large volumes
    • Switching to another (competitive) product is simple
    • The product is not extremely important to buyers; they can do without the product for a period of time
    • Customers are price sensitive
  5. Competitive Rivalry - This describes the intensity of competition between existing firms in an industry. Highly competitive industries generally earn low returns because the cost of competition is high. A highly competitive market might result from:

    • The main issue is the similarity of substitutes. For example, if the price of coffee rises substantially, a coffee drinker may switch over to a beverage like tea.
    • If substitutes are similar, it can be viewed in the same light as a new entrant.
The Industry Handbook: The Airline Industry

  1. The Industry Handbook: Overview
  2. Industry Handbook: Porter's 5 Forces Analysis
  3. The Industry Handbook: The Airline Industry
  4. The Industry Handbook: The Oil Services Industry
  5. The Industry Handbook: Precious Metals
  6. The Industry Handbook: Automobiles
  7. The Industry Handbook: The Retailing Industry
  8. The Industry Handbook: The Banking Industry
  9. The Industry Handbook: Biotechnology
  10. The Industry Handbook: The Semiconductor Industry
  11. The Industry Handbook: The Insurance Industry
  12. The Industry Handbook: The Telecommunications Industry
  13. The Industry Handbook: The Utilties Industry
  14. The Industry Handbook: The Internet Industry
RELATED TERMS
  1. Porter's 5 Forces

    Named after Michael E. Porter, this model identifies and analyzes ...
  2. Competitive Pricing

    Setting the price of a product or service based on what the competition ...
  3. Imperfect Competition

    A type of market that does not operate under the rigid rules ...
  4. Six Forces Model

    A strategic business tool that helps businesses evaluate the ...
  5. Perfect Competition

    A market structure in which the following five criteria are met: ...
  6. Substitute

    A product or service that a consumer sees as comparable. If prices ...
RELATED FAQS
  1. Who uses Porter's 5 forces analysis?

    Find out how the Porter's five forces analysis helps financial decision makers in a company stay profitable and competitive. ... Read Answer >>
  2. Besides Porter's 5 forces, what other forces shape industry in the 21st century?

    Know the forces, in addition to Porter's 5 forces, that influence 21st century corporate structure to effectively plan your ... Read Answer >>
  3. What factors influence competition in microeconomics?

    Find out what influences competition in microeconomics and how perfect competition, monopoly and oligopoly vary in their ... Read Answer >>
  4. What's the difference between Porter's 5 forces and PESTLE analysis?

    Compare how these tools for business analysis can be used to examine competitive situations and to help develop effective ... Read Answer >>
  5. What is the difference between CI (competitive intelligence) and competitive analysis?

    Understand the difference between competitive intelligence and competitive analysis. Learn why a company conducts both types ... Read Answer >>
  6. Should a small business test the substitution effect on its products before launch?

    Explore the substitution effect and find out how small businesses may evaluate how this principle impacts their own products. ... Read Answer >>

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center